Can I Just Amend Tax Returns or Should I Make a Voluntary Disclosure?
When a US person has not properly reported all of their income to the United States government on their tax return, then they are technically out-of-compliance. When a person is noncompliant, they may become subject to fines and penalties – but oftentimes taxpayers can avoid or minimize penalties by submitting to voluntary disclosure. Voluntary disclosure presumes that the taxpayer either has undisclosed foreign assets — or does not qualify as non-willful for undisclosed domestic income (if a person is non-willful and only has unreported income and no reporting, voluntary disclosure may not be necessary). The term voluntary disclosure is a broad tax term that involves both non-willful and willful noncompliance. When a taxpayer is non-willful, they typically will submit to either the streamlined procedures, delinquency procedures, or reasonable cause. If a US person does not qualify as non-willful — or are simply not willing to state under penalty of perjury that they are non-willful — they would instead opt to make a voluntary disclosure program submission using VDP (VDP is the traditional voluntary disclosure program — and since late-2018 is used for both domestic and offshore disclosures). But instead of going through one of the programs, some taxpayers will simply just amend their tax return (aka making a “Quiet Disclosure”). Unfortunately this may lead to much more fines and penalties—and even a potential criminal investigation depending on the facts and circumstances. Let’s go through a few basic reasons why you should not just amend tax returns.
US Tax Returns No Foreign Assets (Non-Willful)
In the simplest of situations, a taxpayer may simply have missed some US income — maybe because they did not receive a 1099 in time to file the tax return and they inadvertently forgot about the income. In this type of situation, generally no voluntary disclosure is required and the taxpayer can simply amend the prior year tax return and explain the reason for the changes on Form 1040X.
US Tax Returns No Foreign Assets (Willful)
When a Taxpayer is willful, it gets much more complicated because they are unable to simply go back and amend a tax return –– even if there are no undisclosed assets –– without making a voluntary disclosure. That is because when a person is willful, they do not qualify for a reasonable cause. This is why it’s crucial that if a taxpayer believes they may have committed a willful violation, they should speak with multiple board-certified tax law specialists to get a better understanding their different options.
US Tax Returns with Foreign Assets (Non-Willful)
If a person has undisclosed foreign assets, accounts, and investments and qualifies as non-willful, they may want to consider entering one of the non-willful disclosure programs. By doing so, a taxpayer can safely get into compliance and depending on their specific facts and circumstances — and which program they qualify for — may qualify for a reduced penalty or even a complete penalty waiver.
US Tax Returns with Foreign Assets (Willful)
If a taxpayer has undisclosed foreign assets, accounts, investments, and income from foreign sources and qualifies as willful, then they would submit to the traditional voluntary disclosure program. Previously, there was an IRS offshoot of the program refer to as OVDP — but that program was discontinued in September 2018 and instead the traditional VDP program was expanded to include both domestic and offshore disclosures.
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